Friday, November 18, 2011

Friday Watch

Posted by Gary .....at 12:48 AM

Evening Headlines

Bloomberg:
  • Euro Rescue Plan Falling Short Renews Franco-German Spat Over Role of ECB. The failure of European leaders to end the debt crisis with their broadest effort yet has revived a Franco-German dispute over the European Central Bank’s role and fueled investor concerns over policy makers’ economic impotence. As holders of Greek debt begin talks in Athens on structuring a 50 percent writeoff that was the cornerstone of a deal pieced together last month at an all-night summit, officials in Berlin and Paris swapped barbs and European borrowing costs outside of Germany rose to euro-era records. The discord highlighted markets’ brushoff of a package that included a scaled-up rescue fund, proposed guarantees of sovereign debt and a bid to attract more international loans. The accord, which finance ministers aim to implement next month, was at least the fourth plan billed as a comprehensive strategy to end the crisis born in Greece in 2009, none of which provided a lasting fix. “The crisis is clearly broadening,” Riccardo Barbieri, London-based chief European economist at Mizuho International Plc, told Bloomberg Radio’s Ken Prewitt yesterday. “Only Germany, and to some extent the Netherlands, are immune from the crisis at the moment.” The premium France pays over Germany to borrow for 10 years jumped to a record 200 basis points. Yields on bonds of countries from Portugal to Finland, the Netherlands to Austria also rose relative to Germany.
  • European Banks Face $270 Billion Goodwill Hangover for Past Acquisitions. European banks may have to write down some of the $270 billion of goodwill from their purchases in the run up to the financial crisis before they can sell assets, or new stock, to bolster capital. UniCredit SpA (UCG), Italy’s biggest lender, this week opted to take an 8.7 billion-euro ($10 billion) impairment charge following a series of acquisitions at home and in eastern Europe. Other European banks are yet to follow, analysts said. Credit Agricole SA (ACA), Banco Santander SA (SAN) and Intesa Sanpaolo SA are among European banks with the most goodwill remaining on their balance sheets, according to data compiled by Bloomberg. “Banks that paid a premium for businesses when the outlook was better will need to reassess the goodwill on their balance sheets,” said Andrew Spooner, an accounting partner at Deloitte LLP in London. “Previous acquisitions which are exposed to peripheral Europe are most vulnerable to impairments.” European bank stocks are trading at an average 58 percent of their book value, according to Bloomberg data. While writing down goodwill won’t deplete banks’ capital for regulatory purposes, it’s a sign that executives overpaid for purchases.
  • GM(GM) Sees Europe Crisis 'More Serious' Than 2008 Credit Bubble. Europe’s debt crisis is a “more serious” situation than the housing bubble three years ago that preceded a global recession, General Motors Co. Chief Executive Officer Dan Akerson said today. “The ’08 recession, which was a credit bubble that manifested itself through primarily the real estate market, that was a serious stress,” Akerson told the Detroit Economic Club today. “The government took some insightful actions. This is much more serious.” GM, which hasn’t turned an annual profit in Europe in more than a decade, has declined in New York trading since rescinding its target for break-even results in the region. European operations lost $292 million before interest and taxes in the quarter ending Sept. 30, GM said last week as it reported a 2.5 percent drop in third-quarter net income. Analysts have slashed their estimates for GM’s adjusted earnings in the fourth quarter by 49 percent after the company said last week that results for the period would be similar to a year earlier, citing weakness in Europe as a factor. All 14 analysts surveyed by Bloomberg cut their estimates in the last two weeks, reducing the average to 44 cents a share, from 86 cents. “We’re dealt a hand and we have to play it as best we can,” Akerson, 63, said today of Europe. “It may get a little ugly at times, a little bumpy.” Asked if some countries such as Greece may eventually leave the euro zone and lead to a breakdown of the currency, Akerson said “I wouldn’t doubt it.” GM slid 3.8 percent to $21.79 at the close in New York. Detroit-based GM plunged 34 percent since its initial public offering a year ago.
  • The 3-Month EUR/USD cross-currency basis swap fell -6.25 bps to -129 bps, the lowest since hitting -145 bps Dec. 2, 2008, amid increasing funding concerns as solutions for solving the EU debt crisis are at an impasse. "Cross-currency tells you the whole world is short on dollars," says Nomura strategist Marcus Phua. "Everyone is experiencing tightness in the market. It's how the crisis has become global in the sense of impact." "Euro banks don't trust each other and non-euro banks shy away from issuing to the Eurozone," said Phua.
  • Bank Stress Gauges Show Pain Lasting Through '11: Credit Markets. Three weeks after European leaders hailed an "historic" agreement to restore confidence to the region's banking system, rising gauges of stress in funding markets signal tensions will last at least through year-end. The gap between three-month euro interbank borrowing and lending rates rose to the wides since March 2009 yesterday in the forward market, used to speculate on future interest rates, according to Bloomberg. The cost for European banks to fund in dollars surged this month, with the three-month cross currency basis swaps falling to as much as 1.32 percentage points below the euro interbank offered rate, the most since December 2008. "We are in the midst of the crisis," Chiara Manenti, a fixed-income strategist at Intesa Sanpaolo Spa in Milan, said in a telephone interview. "The liquidity in the money market is not flowing normally between banks. Tensions in the funding markets will remain through year-end, and will be more pronounced in Europe."
  • China's New Banking Regulator Said to Warn on Government Loans. China’s new banking regulator warned lenders that some projects backed by local governments may run out of funds, and loans to property developers are likely to sour as sales slow, a person with knowledge of the matter said. Shang Fulin, who replaced Liu Mingkang last month as chairman of the China Banking Regulatory Commission, told lenders last week to step up asset sales and debt restructuring for local government financing vehicles that are struggling to repay loans, the person said, declining to be identified because the instructions were private. Shang also said banks should cut “high-risk” loans to developers, the person said. “He knows that he has big shoes to fill, and that Liu Mingkang’s biggest achievement was probably raising the alarm early and repeatedly about potential risks in the banking system,” said Barry Naughton, author of the 2007 book “The Chinese Economy: Transitions and Growth” and a China specialist at the University of California, San Diego. “He’s trying to show that he is aware of the problems and he can also be tough.” Shang’s predecessor tightened capital requirements and clamped down on off-balance sheet assets this year. Still, the International Monetary Fund this week called for closer oversight of Chinese banks as risks increase. Home sales plunged 25 percent in October from the previous month. Industrial & Commercial Bank of China Ltd. and its three biggest local rivals have lost about $71 billion in market value this year. Home prices may fall as much as 30 percent in the next year, Barclays Plc’s research unit said last week. They had risen by 140 percent from 1998 to the end of last year, according to the national statistics bureau. The regulator said some developers have used projects funded by such bank loans to improperly raise funds from trusts, which may trigger “major credit risks,” according to the person. Property loans that need to be restructured should be classified as “substandard” at a minimum and downgraded, the watchdog said. The CBRC last week told banks to inspect loans to local government financing vehicles, 35 percent of whose debt matures in the next three years, the person said. Local governments, previously barred from directly selling bonds or borrowing from banks to pay for projects including roads and bridges, set up more than 6,000 financing vehicles and amassed 10.7 trillion yuan ($1.7 trillion) of debt by the end of 2010, with 80 percent owed to banks, the National Audit Office said in a June report. Premier Wen had ordered the first audit of local-government borrowing in March, amid concern spending designed to support the economy following the 2008 global financial crisis would leave a legacy of bad debt. The regulator warned last week that some local governments are circumventing regulatory restrictions and raising funds by using companies that aren’t classified as financing vehicles, the person said. The banking regulator said it will also stop approving the sale of wealth-management products with maturities of one month or less, the person said.
  • EU Rules May Soak Up $93 Billion of Utility Cash: Energy Markets. Companies from RWE AG to Vattenfall AB may have to find an extra 69 billion euros ($93 billion) to meet unprecedented European Union regulations designed to crack down on speculation in the region's energy markets. A proposal made last month by the EU may for the first time require utilities and other firms with commodity assets to set aside funds safeguard, their power, fuel and carbon permit trades against default. Those companies don't currently need to clear so-called over-the-counter, or OTC, trades which, in power, account for 73 percent of Europe's electricity market. The cost of these financial rules would come on top of $1.9 trillion of capital investment that's needed to expand and upgrade EU power plants through 2035, the International Energy Agency said in a Nov. 9 report. The additional burden of climate-protection rules has already cut 200 billion euros from power-company share values since January 2009, according to Citigroup Inc. Stockholm-based Vattenfall says the new financial rules may cost it more than 1 billion euros. “I can see that the new collateral requirements and costs associated with over-the-counter trades will be high,” said Jacqui Hatfield, a London-based partner and head of financial services at law firm Reed Smith LLP, which has advised on $21 billion of renewable-energy transactions in the past five years.
  • Copper Traders Most Bearish in Two Months on European Crisis: Commodities. Copper traders and analysts are the most bearish in almost two months because of mounting concern that Europe’s debt crisis will curb demand in the region that accounts for about 19 percent of global consumption. Eleven of 23 surveyed by Bloomberg expect the metal to decline, the second consecutive week that their outlook worsened and the highest proportion since Sept. 23. The last time so many were bearish, prices dropped 4.6 percent the following week. The commodity fell more than 20 percent into a bear market since reaching a record in February on signs that economic growth is slowing. European industrial production fell the most in 2 1/2 years in September as governments grappled with sovereign debt crises that have toppled governments in Greece and Italy. Copper demand contracted 0.9 percent in 2008 as economies contended with the worst recession since World War II. “There’s a strong chance of Europe going into a recession,” said William Adams, head of research at London- based Basemetals.com. “Asia is getting more worried that the slowdown in Europe will mean demand for their exports will be hit and therefore that’s going to impact demand for their industrial production.” Copper declined 21 percent to $7,541 a metric ton on the London Metal Exchange this year, heading for the biggest annual drop since 2008.
  • China Power Firm Margins Worst Since 2006 as Coal Rises. Chinese power plants face the smallest profit margins in at least five years as government- mandated caps on electricity prices prevent utilities from passing along coal-price increases.
  • China Home Prices Fall in 33 of 70 Cities. China’s home prices fell in 33 of 70 cities monitored by the government in October, the worst performance since it expanded property curbs and scrapped the reporting of its national average housing data this year. New home prices in China’s three major cities of Shanghai, Shenzhen and Guangzhou retreated from September after prices stalled for three months, while those in the capital city of Beijing were unchanged, the statistics bureau said in a statement on its website today. The eastern city of Wenzhou posted the biggest drop of 4.6 percent, more than 10 times the average slide among the cities that posted declines. China’s Premier Wen Jiabao said the country won’t waver on its property restrictions this month.
Wall Street Journal:
  • European Firms Face Lending Woes. Companies Struggle as Banks Lend Less, at Higher Rates, Forcing Businesses Into Public Markets With Selective Investors. Euro-zone countries aren't the only borrowers whose financing costs are rising: European companies are facing higher capital costs as the debt crisis curtails bank lending and keeps wary investors on the sidelines. The amount of European corporate debt in need of refinancing is set to jump in 2012. But banks are lending less and at higher rates, forcing companies into public markets, where investors are becoming increasingly selective. Less corporate borrowing leads to less corporate investment—another drag on already sickly economies.
  • Fund Transfers Are Focus of MF Global Probe. Regulators have unearthed new details indicating MF Global Holdings Ltd. shifted hundreds of millions of dollars in customer funds to its own brokerage accounts in the days before its bankruptcy filing, according to people familiar with the matter. Such moves could violate regulations stipulating that commodities brokers can't mix customer funds with brokerage funds. Brokerage funds often are used to back proprietary trading positions. According to MF Global's internal records, the transactions were as large as hundreds of millions of dollars at a time, these people said.
  • Prime-Mortgage Standards Tighter Than Pre-Boom Levels. Lending standards for prime mortgages are tighter now than they were even prior to the housing boom. A chart accompanying the Capital column on mortgages this week showed graphically how lenders raised the bar on making loans after the housing bust — and still haven’t returned it to anything resembling what once was normal.
  • Tighter Credit Sending Warning Signals. (graph) The US market has been buoyed by a string of better-than-expected economic reports that have helped encourage the belief that the US is a relatively safe haven, insulated from the problems of Europe. But these data are coincident, or lagging, data at best, warns Mike Darda of MKM Partners. Leading indicators are found in the credit markets and are pointing to tighter financial conditions — and lower stock prices — in the future:
  • Tax Spat Stymies Debt Panel. Both Parties Dig In Over Bush-Era Cuts as Deadline Looms for Agreement.
  • How Congress Occupied Wall Street. Politicians who arrive in Washington as men and women of modest means leave as millionaires. Why?
Business Insider:
 Zero Hedge:
 CNBC:
  • Banks Bracing for 2012 Euro Financial Apocalypse. As the European debt crisis threatens to spiral out of control, banks are scrambling behind the scenes to protect their balance sheets and hedge their exposure to ride-out an increasingly scary 2012. But while some of the moves may help mitigate the losses from Armageddon, market watchers say certain financial insurance policies — particularly credit default swaps on sovereign debt — may not work in a new financial crisis. Banks are loading up on hedges against a possible European financial collapse. The notional amounts outstanding of over-the-counter derivatives rose 18 percent in the first half of 2011 to $708 trillion as of June 2011, a record high, according to a report by the Bank of International Settlements released Wednesday. In the second half of 2010, the notional value rose only by 3 percent. "Given all the increased volatility — the unusual conditions with the dollar and the euro, the debt crisis in Europe, the debt problems of the U.S. — you are seeing an increase in hedging," says Steve Wyatt, professor and Chair of the Finance Department at the Farmer School of Business at Miami University, Ohio. "The more astute observers in the market have come to the conclusion that the ECB will not buy enough paper to change the market view on this because of inflation fears. The only way out of this is fiscal integration or some modification of the membership in the Euro. That is not going to be quick or clean. That is the risk participants are hedging against." Here's a quick snapshot of their exposure and hedges purchased, according to latest disclosures.
  • As New Graduates Return to Nest, Economy Also Feels the Pain.
IBD:
NY Post:
  • Con Ed wants to evict Ground Zero mosque developer over $1.7M back rent. Con Edison wants a judge to give it the green light to evict the would-be developer of a controversial community center and mosque near Ground Zero, arguing he doesn't have a prayer of paying the $1.7 million he owes in back rent. At a hearing in Manhattan Supreme Court today , Con Ed lawyer Scott Mollen portrayed Sharif el-Gamal as a deadbeat slumlord who's far too cash-strapped to pay back all the money he owes the utility.
CNN:
  • Secret Service Confirms Cain Protection. Presidential candidate Herman Cain will receive protection from the United States Secret Service, the agency confirms to CNN. Cain will be the first candidate in the race for the Republican presidential nomination in the 2012 election cycle to be placed under the protection of this federal law enforcement agency. It is not yet clear why Cain is getting Secret Service protection.
Rasmussen Reports:
  • Iowa: Gingrich 32%, Romney 19%, Cain 13%.
  • Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows that 20% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-four percent (44%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -24 (see trends).
Reuters:
  • S&P to Update Bank Credit Ratings Within 3 Weeks. Standard & Poor's plans to update its credit ratings for the world's 30 biggest banks within three weeks and may well mete out a few downgrades in the process, possibly surprising battered global bond markets. Among the institutions that could be downgraded are Bank of America Corp , Citigroup Inc and Morgan Stanley , said Baylor Lancaster, an analyst at CreditSights Inc.
  • UK Banks Sharply Cut Lending to Periphery Eurozone - FT. Britain's banks have shrunk their lending exposure to peripheral euro zone counterparts by a quarter in just three months, the Financial Times reported on Friday. According to data compiled by the newspaper, used as the source for the article, the big four UK banks cut interbank loan volumes by more than 24 percent to 10.5 billion pounds ($16.6 billion) in the three months to end-September, as Europe's debt crisis worsened. UK's Big Four of HSBC, Lloyds, RBS and Barclays reduced sharply their volume of loans to Greek and Spanish banks, continuing an earlier pattern, but the Italian loan slump was new.
  • Salesforce.com(CRM) Shares Drop On Tepid Outlook. Web-based software maker Salesforce.com Inc forecast current-quarter earnings broadly in line with Wall Street estimates and posted a quarterly net loss as its marketing and sales costs increased sharply. The tepid outlook from one of the leaders in Internet-based "cloud" computing suggests it will not avoid the effects of broad cutbacks in corporate spending which have ravaged other technology firms. Salesforce shares fell 6 percent after hours.
  • North America Oct. Chip-Gear Orders Rise 1.4% vs. Sept.
Financial Times:
  • Spain Pushed to Frontline of Euro Crisis. Spain was thrust on to the frontline of the eurozone’s debt crisis on Thursday as investors forced its borrowing costs sharply higher just three days ahead of a general election that opinion polls predict will topple the ruling Socialist party.
Telegraph:
  • Angela Merkel Says UK Must Work With The Eurozone Or Risk Being 'Left Behind'. Angela Merkel has charged Britain to “work with us on the euro” or risk being “left behind” ahead of a testy summit with David Cameron in Berlin on Friday. The German Chancellor will demand British support for treaty changes to allow greater intervention in national economies – powers she says are vital to stem the crisis engulfing Europe’s core.
  • Asian Powers Spurn German Debt On EMU Chaos. Asian investors and central banks have begun to sell German bonds and pull out of the eurozone altogether for the first time since the debt crisis began, deeming EU leaders incapable of agreeing on any coherent policy. Andrew Roberts, rates chief at Royal Bank of Scotland, said Asia's exodus marks a dangerous inflexion point in the unfolding drama. "Japanese and Asian investors are for the first time looking at the euro project and saying `I don't like what I see at all' and fleeing the whole region. "The question on everybody's mind in the debt markets is whether it is time to get out Germany. The European Central Bank has a €2 trillion balance sheet and if the eurozone slides into the abyss, Germany is going to be left holding the baby. We are very close to the point where markets take a close look at this, though we are there yet," he said. Jean-Claude Juncker, Eurogroup chief, fueled the fire by warning that Germany is no longer a sound credit with debt of 82pc of GDP. "I think the level of German debt is worrying. Germany has higher debts than Spain," he said.
Caixin Online:
  • Weaker external demand shouldn't be the basis for China's policy adjustments as the nation's trade surplus decreases and its contribution to economic growth is currently small, citing Long Guoqiang, a researcher at the State Council's Development Research Center. China's policy easing should depend on whether or not the government's inflation target has been met, Long said.
21st Century Business Herald:
  • China plans to allow local government financing vehicles to securitize assets under a trial program in Guangdong, Jiangsu and Zhejiang provinces and in Beijing city, citing National Assoc. of Financial Market Institutional Investors. Airports, toll roads and sewage treatment projects will be among assets that can be securitized.
  • China should include financial risk prevention in its 2012 macro policy, citing Zhang Xiaojing, director of the department of macroeconomics at the state-run Chinese Academy of Social Sciences. This year's macro policy doesn't include financial risk as a task. Zhang's team provides policy-making suggestions to the central government.
China Securities Journal:
  • Chinese exports next year will be "very grim," citing He Fan, deputy director of the Chinese Academy of Social Science's institute of world economics and politics. The euro zone may have another crisis early next year, He says.
Evening Recommendations
Jefferies:
  • Rated (KO) Buy, target $80.
Night Trading
  • Asian equity indices are -2.0% to -1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 215.0 +6.0 basis points.
  • Asia Pacific Sovereign CDS Index 161.0 +3.5 basis points.
  • FTSE-100 futures -1.13%.
  • S&P 500 futures -.19%.
  • NASDAQ 100 futures -.15%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (ANN)/.57
  • (CPWM)/-.37
  • (HIBB)/.51
  • (HNZ)/.80
  • (CYBX)/.30
Economic Releases
10:00 am EST
  • Leading Indicators for October are estimated to rise +.6% versus a +.2% gain in September.

Upcoming Splits

  • None of note
Other Potential Market Movers
  • The Fed's Williams speaking, Fed's Fisher speaking, ECB's Mario Draghi speaking and the (PFCB) investor day could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by technology and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

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